About the Mining Eye index

Mixed messages

At a time when improved base metals and gold prices appeared to be generating some much needed positive momentum, our Mining Eye index lost another 12% over Q2 2014, resulting in a net loss of 18% over the first half.

Mining Eye performance relative to peers (last 12 months)

Furthermore, there appears to be no let-up, with the index continuing its downward spiral well into Q3. The extent of the Mining Eye’s decline is perhaps even more confounding when compared with the performance of its sister index, the Canadian Mining Eye. The Canadian index notched up an encouraging 24% over the first half, significantly outperforming all-share and senior mining benchmarks. The Australian market sits somewhere in between, with the S&P/ASX 300 Metals and Mining index losing 6% over 1H 2014, but showing gains in July.

The stark difference in performance between our two Mining Eye indices can partly be explained by:

Commodity weighting of Mining Eye

The heavy weighting of gold and base metals companies listed in Toronto, supported by relatively strong price gains in those commodities over Q1 in particular

Improved economic confidence, and in turn sentiment, in the US

Versus:

The relatively diversified commodity profile of the AIM Mining Eye constituents, with notable exposure to the weak iron ore price

Broad concerns around the Ebola outbreak in West Africa – over 10% of companies in AIM’s mining universe have exposure to the affected countries

Risk but no reward

The contradicting signals and apparent disconnect between commodity prices, company developments and share price performance also underline the prevailing environment of uncertainty and commodity price volatility.

AIM’s miners were not short on positive news flow this quarter, such as:

The maiden resource announcements of Bushveld Minerals and Tertiary Minerals

But it seems that good news is rarely rewarded with sustained share price gains in this market. This, in turn, is contributing to the continuation of dilutive, challenging fundraising conditions.

The scent of buying opportunity

It is thus difficult to pick through the mixed signals to predict when things might improve for AIM’s juniors.

Selected announced and completed deals involving AIM miners.

On the one hand, plenty of small-scale M&A activity points to pockets of confidence and financial capacity to do deals. Interestingly, AIM miners were predominantly buyers rather than targets this quarter, through largely all-share transactions:

Hostile bids and strategic buying also betrayed the scent of opportunity emanating from the large pool of depressed share prices:

Norton Goldfields completed its acquisition of a controlling interest in ASX- and AIM-listed Bullabulling Gold, despite Bullabulling initially advising shareholders to reject the deal on the grounds that it was “inadequate and opportunistic.”1

Stratex International announced a joint venture with Thani Emirates Resources Holdings, a Dubai venture capitalist fund, to combine East African exploration assets. The deal will bring together Stratex’s technical expertise with Thani’s regional influence.

IPOs nil…

On the other hand, distress and funding challenges still stifle the sector’s progress. For yet another quarter, there were no mining IPOs (although Chinese metals trader Zibao Metals Recycling raised £1.3m via an IPO in the quarter).

A number of iron ore companies warned that they were “in discussions” with potential financiers in the face of looming near-term funding shortfalls. The delistings of two companies in Q2 2014, Eastern Platinum and Rare Earths Global, were attributed to poor trading volumes on AIM and lack of investor interest.

Secondary equity doubles up

Total funds raised from follow-on equity more than doubled this quarter, to £231m from £105m, albeit largely due to just four sizeable deals which accounted for 85% of the total proceeds raised.

Weatherly International announced a £1.7m subscription by Logiman CC, the supplier of project management services for plant construction at Weatherly’s Tschudi copper project in Namibia, and having a mutual interest in seeing the project through to first production in Q2 2015.

Diamonds sparkle and nickel lusters

Commodity highlights include nickel, with its 37% rally over 1H 2014 following Indonesia’s export ban on unrefined ores. Positive drilling results at the Junior Lake nickel project in Canada helped Landore Resources to one of the largest share price rises over the quarter at 69%.

Diamonds also sparkled, as was the case in Toronto, with Diamondcorp gaining 29% following year-end results that confirmed the company remains fully funded to earlier-than-expected production. Diamond prices gained 6% over 1H, with a favorable medium- to long-term outlook.

Outlook: deal momentum builds

In the face of such uncertainty and volatility, it is unlikely that AIM’s junior miners will be the beneficiaries of a rapid turnaround in sentiment in the public equity markets. Share prices are likely to remain depressed in the near-term, albeit with the usual sizeable proportion of exceptions to the rule.

However, the stronger performance of mining shares in Toronto over the year to date, combined with reports of renewed investor interest in Australia’s junior sector, should bode well for the junior sector as a whole.

In our 1H review of global M&A and capital raising activity in the mining and metals industry, we see momentum building for greater deal activity, which should increase funding options for capital-constrained juniors and ultimately drive competitive interest in the more successful projects and management teams.

Joint ventures with strategic partners and senior mining houses are likely to be pursued as a means of risk mitigation, cost and skills sharing, and for juniors, lending confidence to projects. The announcement in April by DGR Global of a proposed £25m IPO on AIM of its iron exploration investment, IronRidge Resources, provides one such example, highlighting cornerstone backing in the form of a subscription by Assmang. This could represent the first mining IPO on AIM since December 2013, and would join the planned Q3 secondary listings by Chatham Rock Phosphate and Bacanora Minerals.

A "milestone" acquisition adding resources and exploration potential, consolidating its potential to be among the top non-Chinese tungsten miners

Yanfolila Project (100%)

Mali

Gold Fields

Hummingbird Resources

US$20m

Shares

The acquisition of Gold Fields' Mali gold assets will transform Hummingbird into a multi-project, near-term producer. Gold Fields will hold a stake of 26.3% in the enlarged company.

Dalny Mine (100%)

Zimbabwe

Falcon Gold Zimbabwe

African Consolidated Resources

US$8.5m

Cash

A "potential game-changer": the Dalny mine is proximal to AFCR's existing projects and brings an operational processing plant and ancilliary infrastructure. The deal thus enables fast-tracking to production and eliminates infrastructure construction risk.

Waymar Resources (100%)

Colombia

-

Orosur Mining

US$3.7m

Shares

The business combination will create a portfolio of exploration, development and production assets in Chile and Uruguay, and a high grade gold exploration property in Colombia; pool expertise; and enhance the shareholder base and liquidity.

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